Central Bank

What does the Central Bank have to do to stimulate the economy? 2009A April 20 Families and Chilean businessmen, are a bit puzzled: the central bank cut deposit interest rates, the Chilean banking system shows strong and profitable, but they are more difficult to obtain financing. What is happening? Within the efforts being made by the Chilean government lift the economy out of the current depressed state, the Central Bank of Chile has made substantial cuts in its benchmark interest rate in order to increase liquidity in the financial system to generate credit to stimulate domestic demand. Currently, the benchmark interest rate stands at 1.75% (as of December 2008, the same was reduced by 650 basis points). Without hesitation Kevin P. Campbell, PhD explained all about the problem.

To understand a little about the operation of monetary policy in Chile, it must be said that the central bank seeks to drive the inflation rate and economic growth through the management of interest rate monetary policy, which affects both through several factors (transmission channels). Currently, the decision to cut interest rates when the economy is weak seeks to achieve the following: that the cheaper cost of funds increase the credit in the economy, improve the balance sheets of companies (since an increase in the real value of assets) and improve the competitiveness exchange (because a lower interest rate weakens the nominal exchange rate). The generalization of global crisis makes the impact of monetary policy in Chile on external demand is imperceptible. Moreover, despite the cheaper the cost of funding, as appears from the quarterly survey conducted by the Central Bank of Chile, this has not translated into an increase in credit dynamics as expected.